Save Tax Through Infrastructure Bonds

With the dawn of the new year, Saving Tax is something that is running on the minds of every individual in India. People are scrambling around to make investments to avail tax benefits under the various sections of the Indian IT Laws. Sec 80C is one of the most widely used tax saving section which offers tax relief on amounts of upto Rs. 1 lakh every financial year. To know more about the various investment options under which you can save tax using this sec 80C click here.

One of the less known and lesser used sections of the Indian Tax System is Section 80CCF. This section offers tax benefits for investments of upto Rs. 20,000/- every year in qualified Infrastructure Bonds. Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

What are the Current Infrastructure Bond Issues that are open now?

Currently there are 3 Infrastructure Bond IPO’s that are open. They are:

1. IDFC Infra Bonds
2. REC Infra Bonds
3. L&T IFC Infra Bonds

IDFC Infra Bonds:

IDFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 10000/- or 2 bonds. The issue is open between 11th January 2012 and 25th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

REC Infra Bonds:

REC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 5000/- or 1 bond. The issue is open between 19th December 2011 and 10th February 2012. They are offering an interest rate of 8.95% & 9.14% per annum for bonds of tenure 10 years and 15 years respectively. The lock-in period is 5 years for 10 year bonds and 7 years for 15 year bonds, after which there is a buy-back option. To know more about this issue click here.

L&T IFC Infra Bonds:

L&T IFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 1000/- with a minimum investment of Rs. 5000/- or 5 bonds. The issue is open between 10th January 2012 and 11th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

All the above issues offer tax benefits under section 80CCF and hence are great opportunities to save an extra amount of tax this financial year.

Happy Tax Saving!!!

Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits

With the new income tax rules in effect, one of the new additions using which a citizen can avail tax benefits is the Infrastructure Bonds that can be till the amount of Rs. 20,000/- for a financial year. So, for a person in the highest tax slab (30%) the tax benefit because of this investment would be around Rs. 6000/- per year.

Before we get into the details as to whether we must invest in these bonds or not, let us find out what these bonds are and how we can invest in them.

What are Infrastructure Bonds:

Infra Bonds are like any other bond that is available in the debt market for purchase with the only difference being the fact that, the funds collected through the sale of these bonds is used for the infrastructural development of India. Hence, to promote more investment in this segment, the government has come up with the tax benefit so that investors would invest in these bonds.

Where to Buy:

You can buy them from the branches of ICICI and IDBI banks. ICICI also offers electronic sale of these bonds where investors with DEMAT accounts can buy them.

Should we Buy these Infrastructure Bonds:

Actually, this is not such a simple question to answer. Let me elaborate why…

A Bond is a debt instrument which pays a periodic/fixed interest which doesn’t change very frequently. It is like Bank Fixed Deposits. So, depending on what income slab you fall under, the answer as to whether to buy these or not would vary.

Let us consider 3 people – Mr. A, Mr. B and Mr. C. These are 3 people who fall under the 3 tax slabs in our Indian Tax Laws. All 3 of them invest Rs. 20,000/- in these infrastructure bonds.

Other Assumptions:
Returns on the Bonds – 8% (Returns on the actual bonds may vary between 6% and 9%. I am taking 8% because that is approximately the rate of returns most debt instruments give us per year)

Annual Inflation Rate – 10% (The Actual inflation rate of our country is much higher, but still I am keeping this at 10% as an average because the fiscal measures taken by our government would bring down the inflation sooner or later)

Lock In Period – 3 years (The actual lock in period may vary from bond to bond)

Interest Compounding – Annual Compounding (The actual interest compounding may vary from bond to bond. I am keeping it annual for ease of calculations)

Let us go through the results of their investments before deciding on who must buy these bonds.

For Mr. A:

Tax Saved (@10%) = Rs. 2,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 7194.24/-

Average profit per year = Rs. 2398.08/-

Which is approximately 11% returns per year. Considering the fact that the inflation is running at more than 10% per annum, actually there is no growth in your investment at the end of 3 years. Even if we consider that inflation was constant @ 10% every year, your investment has grown by 1% every year.

For Mr. B:

Tax Saved (@20%) = Rs. 4,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 9194.24/-

Average profit per year = Rs. 3064.75/-

Which is approximately 15% returns every year. Considering the fact that, the inflation is @ 10%, your investment would grow at approximately 5% every year.

For Mr. C:

Tax Saved (@30%) = Rs. 6,000/-
Interest earned in 3 years = Rs. 5194.24/-

Net Profit on Investment = Rs. 11,194.24/-

Average profit per year = Rs. 3731.41/-

Which is approximately 18.7% returns every year. Considering the fact that, the inflation is @ 10%, your investment would have grown at a handsome rate of 8% every year.

Conclusion:
If you are in the highest tax bracket (30%) then these infrastructure bonds are a definite YES as part of your portfolio. A SAFE AND SOLID INVESTMENT OPTION.

If you are in the medium tax bracket (20%) then you can have a decent allocation (say Rs. 10,000 every year) as part of your portfolio. A SAFE INVESTMENT OPTION.

If you are in the lowest tax bracket (10%) then it is better if you stay away from them.

Happy Investing!!!